BoE expected to cut interest rates to 3.75% as inflation cools and economy slows
Inflation slows to 3.2% in November, unemployment climbs, and growth contracts as policymakers prepare to ease policy further.
The Bank of England is set to cut interest rates from 4.0% to 3.75% at Thursday’s policy meeting, after inflation slowed more than expected in November. Official data show the consumer price index dropping to 3.2% from 3.6%, the lowest reading since March, a development the central bank is expected to use as justification for further easing. The move would mark another step in what markets anticipate as a gradual easing cycle aimed at supporting demand amid a weakened economy.
The inflation decline was led by lower food prices, but price growth remains above the Bank’s 2% target, limiting how far policy can be loosened without rekindling price pressures. The same data sweep also revealed a cooling in the labour market, with unemployment rising to 5.1% — the highest rate in almost five years — as businesses responded to higher costs and slowing demand. Early estimates showed the economy contracted in the latest figures, underscoring the fragile state of the recovery and justifying policymakers’ readiness to ease further to support growth.
Market participants have priced in a near-certain quarter-point cut, even as the Monetary Policy Committee remains divided on the pace and timing of long-run policy shifts. SEI portfolio manager James Mashiter said the market has already baked in another 25 basis-point reduction, likely followed by further action as policymakers lean on weaker activity and a softening labour market to justify easing. He added that while inflation has proven sticky above target, the balance of evidence points toward a more accommodative stance in the near term.
Rob Morgan, a strategist at Charles Stanley, described the labour market as entering a period of “winter hibernation,” noting that slower growth and higher employment costs are leading employers to pull back on hiring. “The UK labour market is curling up for a long winter, chilled by weak growth, rising employment costs, and deep business uncertainty,” he said. “A Bank of England base rate cut tomorrow looks all but certain, with policymakers—governor included—increasingly alarmed by the economic slowdown.”
Andrew Wishart, an economist at Berenberg, warned that the private-sector jobs market is already in recession and that a rate cut would likely be followed by additional reductions in 2026. He projected three further cuts that year, taking the policy rate down to around 3.0% as inflation cools and the BoE prioritises reviving demand to stem job losses. Wishart also cautioned that the central bank’s path will hinge on how quickly inflation moves back toward target and how rapidly the economy regains momentum.
If the data continue to deteriorate, investors expect the BoE to deploy a cautious path of easing rather than an aggressive stimulus program. Banks and households alike have faced higher taxes and costs, robbing the economy of momentum even as price pressures ease. The decision, due on Thursday, will be watched closely by financial markets and by policymakers seeking to balance support for growth with the risk of reigniting inflation.
The Bank’s deliberations come as the broader economy shows signs of cooling. Economists caution that even with a rate cut, the path to sustained growth remains uncertain, with weak demand and soft global conditions continuing to weigh on activity. The latest data reinforce the sense that the BoE is prioritising stabilization of the economy over aggressive stimulus, a posture that could persist into 2026 as inflation gradually eases and unemployment trends remain mixed.
